Through their collective experience, members of an organization can solve two extremely important survival issues.^[686] The first issue is one of external adaptation: What precisely needs to be accomplished, and how can it be done? The second is known as internal integration: How do members resolve the daily problems associated with living and working together?

External Adaptation Issues of external adaptation deal with reaching goals, the tasks to be accomplished, methods used to achieve the goals, and the methods of coping with success and failure. Through their shared experiences, members may develop common views that help guide their day-to-day activities. Organizational members need to know the real mission of the organization, not just the pronouncements to key constituencies, such as stockholders. By talking to one another, members will naturally develop an understanding of how they contribute to the mission via interaction. This view may emphasize the importance of human resources. On the other hand, employees may see themselves as cogs in a machine, or a cost to be reduced.

Closely related to the organization's mission and view of its contribution are the questions of responsibility, goals, and methods. For instance, at 3M, employees believe that it is their responsibility to innovate and contribute creatively. They see these responsibilities reflected in achieving the goal of developing new and improved products and processes.

Each collection of individuals in an organization also tends to (1) separate more important from less important external forces, (2) develop ways to measure their accomplishments, and (3) create explanations for why goals are not always met. At Dell, the retailer of computers and consumer electronics, managers, for example, have moved away from judging their progress against specific targets to estimating the degree to which they are moving a development process forward. Instead of blaming a poor economy or upper-level managers for the firm's failure to reach a goal, Dell managers have set hard goals that are difficult to reach and have redoubled their efforts to improve participation and commitment.^[687]

Leaders on Leadership

Chris Connor is Chairman and CEO of Sherwin-Williams and very proud of the Sherwin-Williams Center of Excellence in Cleveland, Ohio as a living archive of the firm's past accomplishments and dedication to excellence. The museum shows the innovations developed by the firm since its founding in 1866. It is a symbol of their corporate culture. How does Chris describe Sherwin-Williams's culture? "I love the culture of winning we've created at Sherwin Williams. This is a company where individuals get promoted based on performance ... We believe in providing training and developmental experiences for our employees ... Sherwin Williams believes in providing opportunity for people to build wealth—real wealth." His advice to those starting their career, "look for a company that is committed to training and developing their most important asset: the people in their corporation. Make sure the company provides promotional opportunities quickly, based on hard work and performance ..."

The final issues in external adaptation deal with two important, but often neglected, aspects of coping with external reality. First, individuals need to develop acceptable ways of telling outsiders just how good they really are. At 3M, for example, employees talk about the quality of their products and the many new, useful products they have brought to the market. Second, individuals must collectively know when to admit defeat. At 3M, the answer is easy for new projects: at the beginning of the development process, members establish "drop" points at which to quit the development effort and redirect it.^[688]

In sum, external adaptation involves answering important instrumental or goal-related questions concerning coping with reality: What is the real mission? How do we contribute? What are our goals? How do we reach our goals? What external forces are important? How do we measure results? What do we do if we do not met specific targets? How do we tell others how good we are? When do we quit? Chris Connor of Sherwin-Williams expressed his firm's approach to external adaptation in terms of winning (see Leaders on Leadership).^[689]

The process of internal integration often begins with the establishment of a unique identity; that is, each collection of individuals and each subculture within the organization develops a unique definition of itself. Through dialogue and interaction, members begin to characterize their world. They may see it as malleable or fixed, filled with opportunity or threatening. Real progress toward innovation can begin when group members collectively believe that they can change important parts of the world around them and that what appears to be a threat is actually an opportunity for change.

The Culture at Aetna

Aetna, one of the nation's leading diversified health care benefits companies, describes its corporate culture as employees who "work together openly, share information freely and build on each other's ideas to continually create the next better way. Nothing is impossible to our Aetna team. We are eager, ambitious learners and continuous innovators. And we are succeeding. Every day."

Three important aspects of working together are (1) deciding who is a member of the group and who is not, (2) developing an informal understanding of acceptable and unacceptable behavior, and (3) separating friends from enemies. These are important questions for managers as well. A key to effective total quality management, for instance, is that subgroups in the organization need to view their immediate supervisors as members of the group. The immediate supervisor is expected to represent the group to friendly higher managers. Of course, should management not be seen as friendly, the process of improving quality could quickly break down.^[690]

To work together effectively, individuals need to decide collectively how to allocate power, status, and authority. They need to establish a shared understanding of who will get rewards and sanctions for specific types of actions. Too often, managers fail to recognize these important aspects of internal integration. For example, a manager may fail to explain the basis for a promotion and to show why this reward, the status associated with it, and the power given to the newly promoted individual are consistent with commonly shared beliefs. Collections of individuals also need to work out acceptable ways to communicate and to develop guidelines for friendships. Although these aspects of internal integration may appear esoteric, they are vital. For example, to function effectively as a team, team members must recognize that some members will be closer than others; friendships are inevitable.^[691]

Resolving the issues of internal integration helps individuals develop a shared identity and a collective commitment. It may well lead to longer-term stability and provide a lens for members to make sense of their part of the world. In sum, internal integration involves answers to important questions associated with living together. What is our unique identity? How do we view the world? Who is a member? How do we allocate power, status, and authority? How do we communicate? What is the basis for friendship? Answering these questions is important to organizational members because the organization is more than just a place to work.^[692]

While smaller firms often have a single dominant culture with a universal set of shared actions, values, and beliefs, most larger organizations contain several subcultures as well as one or more countercultures.^[693]

Subcultures Subcultures are groups of individuals who exhibit a unique pattern of values and a philosophy that is not inconsistent with the organization's dominant values and philosophy.^[694] While subcultures are unique, their members' values do not clash with those of the larger organization. Interestingly, strong subcultures are often found in task forces, teams, and special project groups in organizations. The subculture emerges to bind individuals working intensely together to accomplish a specific task. For example, there are strong subcultures of stress engineers and liaison engineers in the Boeing Renton plant. These highly specialized groups must solve knotty technical issues to ensure that Boeing planes are safe. Though distinct, these groups of engineers also share in the dominant values of Boeing.

Countercultures In contrast, countercultures are groups where the patterns of values and philosophies outwardly reject those of the larger organization or social system.^[695] When Stephen Jobs reentered Apple computer as its CEO, he quickly formed a counterculture within Apple. Over the next 18 months, numerous clashes occurred as the followers of the old CEO (Gil Amelio) fought to maintain their place and the old culture. Jobs won and Apple won. His counterculture became dominant.^[696] Every large organization imports potentially important subcultural groupings when it hires employees from the larger society. In North America, for instance, subcultures and countercultures may naturally form based on ethnic, racial, gender, generational, or locational similarities. In Japanese organizations, subcultures often form based on the date of graduation from a university, gender, or geographic location. In European firms, ethnicity and language play an important part in developing subcultures, as does gender. In many less developed nations, language, education, religion, or family social status are often grounds for forming popular subcultures and countercultures.

Within an organization, mergers and acquisitions may produce adjustment problems. Employers and managers of an acquired firm may hold values and assumptions that are inconsistent with those of the acquiring firm. This is known as the "clash of corporate cultures."^[697] As more firms globalize and use mergers and acquisitions to expand, often they must cope with imported subcultures and the subsequent clash of corporate cultures. For instance, when Daimler Benz purchased Chrysler Corporation, Daimler billed the purchase as a merger of equals. The corporate culture clash came quickly, however, when Chrysler managers and employees realized that Daimler executives would control the new combination and form it around the German partner. Within a few short years, Daimler executives realized they could not change the Chrysler culture and sold most of Chrysler.^[698] With the recent consolidation of banks and brokerage firms, culture clashes within the huge financial services firms have become quite common. For example, Bank of America has had difficulty with the huge bonuses it gives to traders in its newly acquired Merrill Lynch unit.

Corporate mergers across national boundaries often serve to highlight both corporate and national cultural differences as in the case of Daimler Benz and Chrysler.^[699] The difference between Sony's corporate emphasis on group achievements and Zenith's emphasis on individual engineering excellence, for example, can be traced to the Japanese emphasis on collective action versus the U.S. emphasis on individualism. National cultural values may also become embedded in the expectations of important organizational constituencies and in generally accepted solutions to problems.

When moving across national cultures, managers need to be sensitive to national cultural differences so that their actions do not violate common assumptions in the underlying national culture. To improve morale at General Electric's French subsidiary, Chi. Generale de Radiologie, American managers invited all of the European managers to a "get-acquainted" meeting near Paris. The Americans gave out colorful t-shirts with the GE slogan, "Go for One," a typical maneuver in many American training programs. The French resented the t-shirts. One outspoken individual said, "It was like Hitler was back, forcing us to wear uniforms. It was humiliating." Firms often face problems in developing strong ethical standards, and some, like Flowserve, as featured in Ethics in OB, take extensive measures to support an ethical culture.^[700]

ETHICS IN OB

THE DILEMMA OF WHOSE ETHICS?

It often goes unsaid that the culture of the organization should be ethical. Consider Flowserve. It is a recognized world leader in supplying pumps, valves, and seals to a wide variety of industries. It has over 14,000 employees in 56 countries and offices in the Americas, Australia, Eurasia, and the Middle East. How does it develop and maintain culture across so many regions?

Its solution of maintaining an ethical culture, in part, rests on a well developed code of ethics as well as an emphasis on integrity and trust to define its character. In every location it emphasizes Commitment, Creativity, Competence, Character, Confidence, and Collaboration. Employees are to follow a well developed and very specific U.S.-based code of ethics, and are asked to report problems through the Web site or hotline. The code of ethics shows exactly how to be ethical.

Note

"Is It Appropriate?" Is it appropriate to impose U.S.-based ethical solutions on individuals from other nations with different cultures?

Importing Societal Subgroups Beyond becoming culturally sensitive, difficulties often arise with importing groupings from the larger society. Some of these groupings are relevant to the organization while other may be quite destructive. At the one extreme, senior managers can merely accept societal divisions and work within the confines of the larger culture. There are three primary difficulties with this approach. First, subordinated groups, such as members of a specific religion or ethnic group, are likely to form into a counterculture and to work more diligently to change their status than to better the firm. Second, the firm may find it extremely difficult to cope with broader cultural changes. For instance, in the United States the expected treatment of women, ethnic minorities, and the disabled has changed dramatically over the last 20 years. Firms that merely accept old customs and prejudices have experienced a greater loss of key personnel and increased communication difficulties, as well as greater interpersonal conflict, than have their more progressive counterparts. Third, firms that accept and build on natural divisions from the larger culture may find it extremely difficult to develop sound international operations. For example, many Japanese firms have had substantial difficulty adjusting to the equal treatment of women in their U.S. operations.^[701]

Building Upon National Cultural Diversity At the other extreme, managers can work to eradicate all naturally occurring national subcultures and countercultures. Firms are groping to develop what Taylor Cox calls the multicultural organization. The multicultural organization is a firm that values diversity but systematically works to block the transfer of societally based subcultures into the fabric of the organization.^[702] Because Cox focuses on some problems unique to the United States, his prescription for change may not apply to organizations located in other countries with much more homogeneous populations.

Cox suggests a five-step program for developing the multicultural organization. First, the organization should develop pluralism with the objective of multi-based socialization. To accomplish this objective, members of different naturally occurring groups need to school one another to increase knowledge and information and to eliminate stereotyping. Second, the firm should fully integrate its structure so that there is no direct relationship between a naturally occurring group and any particular job—for instance, there are no distinct male or female jobs. Third, the firm must integrate the informal networks by eliminating barriers and increasing participation. That is, it must break down existing societally based informal groups. Fourth, the organization should break the linkage between naturally occurring group identity and the identity of the firm. Fifth, the organization must actively work to eliminate interpersonal conflict based on either the group identity or the natural backlash of the largest societally based grouping.

Figure 15.1 illustrates the observable aspects of culture, shared values, and underlying assumptions as three layers.^[703] The deeper one digs, the more difficult it is to discover the culture but the more important an aspect becomes.

The first level concerns observable culture, or "the way we do things around here." Important parts of an organization's culture emerge from the collective experience of its members. These emergent aspects of the culture help make it unique and may well provide a competitive advantage for the organization. Some of these aspects may be observed directly in day-to-day practices. Others may have to be discovered—for example, by asking members to tell stories of important incidents in the history of the organization. We often learn about the unique aspects of the organizational culture through descriptions of specific events.^[704] By observing employee actions, listening to stories, and asking members to interpret what is going on, one can begin to understand the organization's culture. The observable culture includes the unique stories, ceremonies, and corporate rituals that make up the history of the firm or a group within the firm.

Figure 15.1. Three levels of analysis in studying organizational culture.

The second layer recognizes that shared values can play a critical part in linking people together and can provide a powerful motivational mechanism for members of the culture. Many consultants suggest that organizations should develop a "dominant and coherent set of shared values."^[705] The term shared in cultural analysis implies that the group is a whole. Not every member may agree with the shared values, but they have all been exposed to them and have often been told they are important. At General Mills, for example, innovation is part of everyone's vocabulary. Such is also the case with Microsoft.

The Shared Passions at Microsoft

At Microsoft, they profess to "share a passion for technology and what it can do for people. It's a shared passion for innovation, exploration, and creativity, and a belief in the value of software and the difference it can make in people's lives."

At the deepest layer of cultural analysis are common cultural assumptions; these are the taken-for-granted truths that collections of corporate members share as a result of their joint experience. It is often extremely difficult to isolate these patterns, but doing so helps explain why culture invades every aspect of organizational life.

To begin understanding a corporate culture, it is often easiest to start with stories. Organizations are rich with stories of winners and losers, successes and failures. Perhaps one of the most important stories concerns the founding of the organization. The founding story often contains the lessons learned from the heroic efforts of an embattled entrepreneur, whose vision may still guide the firm. The story of the founding may be so embellished that it becomes a saga—a heroic account of accomplishments.^[706] Sagas are important because they are used to tell new members the real mission of the organization, how the organization operates, and how individuals can fit into the company. Rarely is the founding story totally accurate, and it often glosses over some of the more negative aspects of the founders. Such is the case with Monterey Pasta.^[707]

On its Web site, the organization says of its history, "The Monterey Pasta Company was launched from a 400-square-foot storefront on Lighthouse Avenue in Monterey, California in 1989.... The founders started their small fresh pasta company in response to the public's growing interest in healthy gourmet foods. Customers were increasingly excited about fresh pasta given its superior quality and nutritional value, as well as ease of preparation.... The company soon accepted its first major grocery account.... In 1993, the company completed its first public offering." The Web site fails to mention another interesting aspect of the firm. An unsuccessful venture into the restaurant business in the mid-1990s provided a significant distraction, and substantial losses were incurred before the company was refocused on its successful retail business. But why ruin a good founding story?

If you have job experience, you may well have heard stories concerning the following questions: How will the boss react to a mistake? Can someone move from the bottom to the top of the company? What will get me fired? These are common story topics in many organizations.^[708] Often, the stories provide valuable but hidden information about who is more equal than others, whether jobs are secure, and how things are really controlled. In essence, the stories begin to suggest how organizational members view the world and live together.

Some of the most obvious aspects of organizational culture are rites and rituals.^[709] Rites are standardized and recurring activities that are used at special times to influence the behaviors and understanding of organizational members; rituals are systems of rites. It is common, for example, for Japanese workers and managers to start their workdays together with group exercises and singing of the "company song." Separately, the exercises and song are rites. Together, they form part of a ritual. In other settings, such as Mary Kay Cosmetics, scheduled ceremonies reminiscent of the Miss America pageant (a ritual) are used regularly to spotlight positive work achievements and reinforce high-performance expectations with awards, including gold and diamond pins and fur stoles.

Rituals and rites may be unique to particular groups within the organization. Subcultures often arise from the type of technology deployed by the unit, the specific function being performed, and the specific collection of specialists in the unit. A unique language may well maintain the boundaries of the subculture. Often, the language of a subculture, and its rituals and rites, emerge from the group as a form of jargon. In some cases, the special language starts to move outside the firm and begins to enter the larger society. For instance, look at Microsoft Word's specialized language, with such words as hyperlink, frames, and autoformat. It's a good thing they also provide a Help button defining each.

Another observable aspect of corporate culture centers on the symbols found in organizations. A cultural symbol is any object, act, or event that serves to transmit cultural meaning. Good examples are the corporate uniforms worn by UPS and Federal Express delivery personnel.

Organizational culture often specifies when various types of actions are appropriate and where individual members stand in the social system. These cultural rules and roles are part of the normative controls of the organization and emerge from its daily routines.^[710] For instance, the timing, presentation, and methods of communicating authoritative directives are often quite specific to each organization. In one firm, meetings may follow a set rigid agenda. The manager could go into meetings to tell subordinates what to do and how to accomplish tasks. Private conversations prior to the meeting might be the place for any new ideas or critical examination. In other firms, meetings might be forums for dialogue and discussion, where managers set agendas and then let others offer new ideas, critically examine alternatives, and fully participate. Take a look at how R&R Partners uses what they call a SWARM.^[711]

The SWARM at R&R Partners

At R&R Partners, the Las Vegas-based advertising agency and lobbying firm, there is a creative culture that permeates the entire organization, as everyone is responsible for creating new ideas. When new ideas are needed, everyone at R&R is invited into the agency's "war room" to brainstorm. These brainstorming sessions are called a SWARM.

To describe more fully the culture of an organization, it is necessary to go deeper than the observable aspects. To many researchers and managers, shared common values lie at the very heart of organizational culture.

Shared Values Shared values help turn routine activities into valuable and important actions, tie the corporation to the important values of society, and possibly provide a very distinctive source of competitive advantage. In organizations, what works for one person is often taught to new members as the correct way to think and feel. Important values are then attributed to these solutions to everyday problems. By linking values and actions, the organization taps into some of the strongest and deepest realms of the individual. The tasks a person performs are given not only meaning but also value: what one does is not only workable but correct, right, and important. At Lam Research Corporation, for instance, they are very clear about their core values as they provide meaning for everyone's work.^[712]

Some successful organizations share some common cultural characteristics.^[713] Organizations with "strong cultures" possess a broadly and deeply shared value system. Unique, shared values can provide a strong corporate identity, enhance collective commitment, provide a stable social system, and reduce the need for formal and bureaucratic controls. For firms in a very stable domestic environment, several consultants suggest firms develop a "strong culture."^[714] By this, they basically mean:

A strong culture can be a double-edged sword, however. A strong culture and value system can reinforce a singular view of the organization and its environment. If dramatic changes are needed, it may be very difficult to change the organization. General Motors may have a "strong" culture, for example, but the firm faces enormous difficulty in its attempts to adapt its ways to a dynamic and highly competitive environment.

Lam Research

Lam is a major supplier of wafer fabrication equipment and related services to the semiconductor industry. They are very clear about their core values, which include achievement, honesty and integrity, innovation and continuous improvement, mutual trust and respect, open communication, ownership and accountability, teamwork, and think: customer, then company, then individual.

In many corporate cultures, one finds a series of common assumptions known to most everyone in the corporation: "We are different." "We are better at...." "We have unrecognized talents." Cisco Systems provides an excellent example. Senior managers often share common assumptions, such as "We are good stewards" and "We are competent managers" and "We are practical innovators." Like values, such assumptions become reflected in the organizational culture.

Shared Meanings When observing the actions within a firm, it is important to keep in mind the three levels of analysis we mentioned earlier. What you see as an outside observer may not be what organizational members experience because members may link actions to values and unstated assumptions. For instance, in the aftermath of 9/11 many saw crane operators moving wreckage from an 18-acre pile of rubble into waiting trucks. Farther up the worksite, many saw steelworkers cutting beams while police seemed to stand around talking to a few firemen. If you probe the values and assumptions about what these individuals are doing, however, you get an entirely different picture. They were not just hauling away the remnants of the twin towers at the World Trade Center complex. They were rebuilding America. These workers had infused a larger shared meaning—or sense of broader purpose—into their tasks. Through interaction with one another, and as reinforced by the rest of their organizations and the larger society, their work had deeper meaning. In this deeper sense, organizational culture is a "shared" set of meanings and perceptions. In most corporations, these shared meanings and perceptions may not be as dramatic as those shared at Ground Zero, yet in most firms employees create and learn a deeper aspect of their culture.^[715]

Organizational Myths In many firms, the management philosophy is supported by a series of organizational myths. Organizational myths are unproven and often unstated beliefs that are accepted uncritically. Often corporate mythology focuses on cause-effect relationships and assertions by senior management that cannot be empirically supported.^[716] While some may scoff at organizational myths and want to see rational, hard-nosed analysis replace mythology, each firm needs a series of managerial myths.^[717] Myths allow executives to redefine impossible problems into more manageable components. Myths can facilitate experimentation and creativity, and they allow managers to govern. Of course, there is also a potential downside to the power of myths.

Three common myths may combine to present major risk problems.^[718] The first common myth is the presumption that at least senior management has no risk bias. This myth is often expressed as, "Although others may be biased, I am able to define problems and develop solutions objectively." We are all subject to bias in varying degrees and in varying ways. As an issue becomes more complex it is much more likely there are several biased viable interpretations.

A second common myth is the presumption of administrative competence. Managers at all levels are subject to believing that their part of the firm is okay and just needs minor improvements in implementation. As we have documented throughout this book, such is rarely the case. In almost all firms, there is often considerable room for improvement. One particularly damaging manifestation of this myth is that new process and product innovations can be managed in the same way as older ones.

A third common myth is the denial of trade-offs. Most managers believe that their group, unit, or firm can avoid making undesirable trade-offs and simultaneously please nearly every constituency. Whereas the denial of trade-offs is common, it can be a dangerous myth in some firms. An emphasis on a single goal often means that other goals are neglected. For example, throughout this book we have emphasized ethics to remind the reader that ethics does not stem from the search for higher efficiency. It is a worthy goal among several.

How the Mighty Fall

In his new book How the Mighty Fall, consultant and author Jim Collins asks what can be learned from the failures of previously great companies. He likens corporate decline to a "disease"—the firm looks good on the outside but is sick on the inside. The first stage of decline is "hubris born of success," a point where arrogance in leadership leads to strategic neglect.

The myths may be combined in organizational practice. Purposeful unintended consequences arise from the collective application of these three myths by a wide number of individuals.^[719] Over the last decade, banks and financial institutions bought and sold mortgage-backed derivatives under the myths that they could (1) accurately judge the risk themselves and value them accurately (they were not risk biased), (2) administer these complex instruments in a manner similar to traditional mortgages (the presumption of administrative competence), and (3) gain great short-term returns without threatening long-term profitability (denial of trade-offs). These combined myths allowed the managers to dismiss collectively the potential of a systematic meltdown of the entire financial system (the unintended consequence). Yet, by the end of 2008 and the beginning of 2009 the global financial system almost collapsed from these and related problems. Was the unintended consequence pursued on purpose? Yes and no. No one manager sought a meltdown. Yet, collectively, millions of mortgages were granted to individuals with questionable credit based on the assumption that housing values would increase forever. Derivatives based on these mortgages proliferated. It took unprecedented actions by many central banks and governments to avert a collapse.

And yet, mortgage-backed securities and derivatives were one of the financial system's major innovations toward the turn of the century. They were an important way to broaden the financial support for housing. Initially they appeared quite successful and provided financial institutions with a way to grow and prosper. So, we turn to the topic of innovation to delve more deeply into this important factor for growth and prosperity.

The basic steps in a typical process of organizational innovation are shown in Figure 15.2. They include:

It takes many creative ideas to establish a base for initial experimentation. Moreover, many successful initial experiments are just not feasible. Even among the few feasible ideas, only the rare idea actually makes it into application. Finally, innovative entities benefit from and require top-management support. Senior managers can and must provide good examples for others, eliminate obstacles to innovation, and try to get things done that make innovation easier.

By emphasizing the innovation process, innovative entities often adapt a different culture from the ones typically found where more routine operations are paramount. Innovative entities look to the future, are willing to cannibalize existing products in their development of new ones, have a high tolerance for risk, have a high tolerance for mistakes, respect well-intentioned ideas that just do not work, prize creativity, and reward and give special attention to idea generators, information keepers, product champions, and project leaders. They also prize empowerment and emphasize communication up, down, and across all individuals in the unit.^[722]

Figure 15.2. The innovation process: a case of new product development.

While it is convenient to depict the process as a sequential four-step affair, you should be aware that in practice the process of innovation is often quite messy. With initial experimentation, for instance, the very act of sharing ideas with others can, and often does, yield a completely new set of ideas. Even in final application, the process does not stop, as astute innovators carefully listen to customers and clients to make further improvements.

While the desire to improve financial performance is often important in stimulating innovation, it is also important to note that innovation can arise from the desire of the firm to be more legitimate in the eyes of key stakeholders, such as government regulators. For example, one recent study suggested that pressures from regulators and a prior record of poor environmental performance yielded more innovative environmental responses from firms. There was an exception, however, in that firms with greater slack resources did not respond as positively to regulatory pressures even if they had a record of poorer prior environmental performance.^[723]

Product innovations result in the introduction of new or improved goods or services to better meet customer needs. A number of studies suggest that the key difficulty with product development is the integration across all of the units needed to move from the idea stage to final implementation.^[724] Culturally, new product development often challenges existing practice, existing value structures, and common understandings. For instance, by its very definition, product innovation means that the definition of the business will change. Many firms find it difficult to cannibalize their existing product line-up in the hope new products will be even more successful. Yet, this is what often needs to be done.^[725]

Product innovation is so important that there have been a number of government-based initiatives to help spur the development of new products. Individuals proposing initiatives point to the revolution resulting from the development of the Internet, the hope for new green technologies, and the promise of medical breakthroughs to change the human condition. One important new study suggests that corporate culture, rather than national policy, makes the biggest difference with radical product innovation.

Examine the OB Research Insight as it highlights the results of an examination of innovation across some seventeen nations.^[726]

A number of interrelated firms may share the product innovation process.^[727] Generally speaking, large complex products are often combinations of individual components from a variety of corporations. At the extreme, there is open innovation where each firm knows what the others are doing. Control is exercised by a common design, often under the direction of a single integrator who maintains the dominant design. This is often the model in computer software, for instance. It is important to note that the development and control of the dominant design can be linked to extremely high profitability.^[728] Further, the dominant design is often not the best technical solution—it is the solution most adopted by a large number of users.

Where the product innovation process is less open, firms often find that coordination with lead users can help provide design insights.^[729] Yet, firms typically confront waning commitment to product innovation. While no solution is perfect, several studies suggest that the development of multidisciplinary teams can help maintain broader commitment. Of course, just the inclusion of individuals with diverse skills, interests, and perspectives calls for astute management. As we said—the innovation process is far from easy.

Process innovations result in the introduction of new and better work methods and operations. Perhaps one of the most interesting and difficult types of process improvement is that of management innovation.^[730] Obviously, much management innovation comes from the vast industry known as management consulting, Unfortunately, many of the new management practices coming from these outside units are more fashions and fads than workable solutions to the problems faced by individual firms. The key to successful managerial innovation often involves extensive interaction with peers, subordinates, and superiors. As astute managers try new practices they compare initial implementation with the reactions of peers and subordinates to refine and modify the practice. Often this process of trial and error takes several iterations before the practice becomes accepted well enough to provide the intended benefits.

As suggested by Figure 15.2, the innovation continuum runs from exploration to exploitation.^[731] In the early stages of innovation, time, energy, and effort to explore potentials are necessary. These early phases are the result of the research and development units found in so many companies. Yet, too much emphasis on exploration will yield a whole list of potential ideas for new products and processes to new clients and customers in new markets, but little pay-off. It is also important to stress exploitation to capture the economic value stemming from exploration.^[732] Exploitation often focuses on refinement and reuse of existing products and processes. Refining an existing product to make it more saleable in a new market is an example of exploitation. Of course, too much emphasis on exploitation and the firm loses its competitive edge because its products become obsolete and its processes less effective and efficient than those of competitors.

RESEARCH INSIGHT

The Role of Firm and National Factors in Dramatic Product Innovations

Gerard Tellis, Jaideep Prabhu, and Rajesh Chandy examined the potential importance of a number of national and firm factors typically associated with dramatic product innovations for some 750 firms in 17 different nations. Specifically they examined cultural, labor, and capital based measures for each firm and each nation.

The researchers found that a firm's culture was the most important predictor of innovation and it was also related to the firm's subsequent financial performance. The important firm cultural factors included the willingness to cannibalize existing products, a strong emphasis on future markets, a high tolerance for risk, the grooming of product champions, and the implementation of incentives for innovation.

Tellis, et al. also found that the industry of the firm and its history of patents were far less important than expected. It was the firm culture that mattered for innovation. And they found that national capital factors and the population size of the nation were related to the financial performance of the firm.

The schematic depicts their initial model of national and firm factors predicting innovation.

What Do You Think?

Does this model and research do a good job of exploring how firm and national factors can influence product innovation? What further questions on this topic might you suggest for attention by researchers? Is there a difference between what is needed for an innovation and what is needed for making the innovation pay off financially?

Source: Gerard J. Tellis, Jaideep C. Prabhu, & Rajesh K. Chandy, "Radical Innovation Across Nations: The Preeminence of Corporate Culture," Journal of Marketing, (2009) Vol. 73 #1, pp. 3–23.

The admonition to balance exploration and exploitation sounds very simple but it comes with a major problem. Exploration calls for the organization and its managers to stress freedom and radical thinking and therefore opens the firm to big changes—or what some call radical innovations.^[733] While some radical departures are built upon existing competencies, often the adoption of a radically new product or process means that the existing knowledge within a firm is invalidated.^[734] Conversely, an emphasis on exploitation stresses control and evolutionary development. Such exploitation can be planned with tight budgets, careful forecasts, and steady implementation. It is often much easier to stress exploitation because most organizations have a structure and culture that emphasize stability and control.^[735]

Managers may attempt to solve this tension between exploration and exploitation in a variety of ways. One partial solution is to have separate units for the two types of activities. For example, some firms rely heavily upon cooperative R&D arrangements with other firms for exploration and keep a tight rein on exploitation within the firm.^[736] Others rely upon middle managers to reconcile the tensions stemming from attempts to link explorative and exploitative groups. However, the desired mix of explorative and exploitative may well depend upon the industry setting.

Recent research suggests a more culturally oriented solution based on the notion of an ambidextrous organization. First, managers must recognize the tension between exploration and exploitation. Second, they should realize that one form of thinking based on a single perspective is inappropriate. Third, managers need to discuss with their subordinates the paradoxes arising from simultaneously thinking about big ideas and sound incremental improvements. Fourth, managers must encourage subordinates to embrace these paradoxes and use them as motivations to provide creative solutions.^[737]

The process of managing organizational culture calls for a clear understanding of the organizational subculture at the top and a firm recognition of what can and cannot be changed. The first step in managing an organizational culture is for management to recognize its own subculture. Key aspects of the top-management subculture are often referred to in the OB literature by the term management philosophy. A management philosophy links key goal-related strategic issues with key collaboration issues and comes up with a series of general ways by which the firm will manage its affairs.^[738] A well-developed management philosophy is important because it links strategy to a more basic understanding of how the firm is to operate. Specifically, it (1) establishes generally understood boundaries for all members of the firm, (2) provides a consistent way of approaching new and novel situations, and (3) helps hold individuals together by assuring them of a known path toward success. In other words, it is the way in which top management addresses the questions of external adaptation.

When the management philosophy stresses security and stability, management reinforces such values as benevolence. Such firms tend to be less innovative than when the management philosophy is more self-directive and reinforces risk taking. When the management philosophy stresses reaching out to others, embracing novel situations, and collectively developing a new path toward new visions of success, there is greater innovation.^[739]

For instance, Cisco Systems has a clearly identified management philosophy linking the strategic concerns of growth, profitability, and customer service with observable aspects of culture and selected desired underlying values. In the case of Cisco Systems' growth and profitability, customer service is linked to (1) empowering employees to generate the best ideas quickly and to implement them successfully, (2) hiring the best people because the ideas and intellectual assets of these colleagues drive success, and (3) developing and disseminating information to compete in the world of ideas. While elements of a management philosophy may be formally documented in a corporate plan or statement of business philosophy, it is the well-understood fundamentals these written documents signify that form the heart of a well-developed management philosophy.^[740]

Managers can modify the visible aspects of culture, such as the language, stories, rites, rituals, and sagas. They can change the lessons drawn from common stories and even encourage individuals to see the reality they see. Because of their positions, senior managers can interpret situations in new ways and can adjust the meanings attached to important corporate events. They can create new rites and rituals. Executives can back these initiatives with both their words and their actions. This takes time and enormous energy, but the long-run benefits can also be great.

One of the key ways management influences the organizational culture is via the reward systems it establishes. In many larger U.S.-based firms the reward system matches the overall strategy of the firm and reinforces the culture emerging from day-to-day activities. Two patterns of reward systems, strategies, and corporate cultures are common. The first is a steady-state strategy matched with hierarchal rewards and consistent with what can be labeled a clan culture.

Culture at Cousin's Subs

Christine Specht, the Chief Operating Officer of Cousin's Subs, notes the importance of culture and her intention to keep stressing the key attributes her father instilled. She notes, "Our food is better; our sandwiches are bigger. More importantly, they are made by people who really care about serving the guests.... we have a great organizational culture of people who really care about the company and the guest."

Specifically, rewards emphasize and reinforce a culture characterized by long-term commitment, fraternal relationships, mutual interests, and collegiality with heavy pressures to conform from peers and with superiors acting as mentors. Firms with this pattern were in such industries as power generation, chemicals, mining, and pharmaceuticals. In contrast was a second pattern where the strategy stressed evolution and change. Here the rewards emphasized and reinforced a more market culture. That is, rewards emphasized a contractual link between employee and employer, focused on short-term performance, and stressed individual initiative with very little pressures from peers to conform and with supervisors acting as resource allocators. Firms with this pattern were often in such industries as restaurants, consumer products, and industrial services.^[741]

Beyond reward systems, top managers can set the tone for a culture and for cultural change. Managers at Aetna Life and Casualty Insurance built on its humanistic traditions to provide basic skills to highly motivated but under-qualified individuals. Even in the highly cost-competitive steel industry, Nucor executives built on basic entrepreneurial values in U.S. society to reduce the number of management levels by half.

Each of these examples illustrates how managers can help foster a culture that provides answers to important questions concerning external adaptation and internal integration. Recent work on the linkages between corporate culture and financial performance reaffirms the importance of an emphasis on helping employees adjust to the environment. It also suggests that this emphasis alone is not sufficient. Neither is an emphasis solely on stockholders or customers associated with long-term economic performance. Instead, managers must work to emphasize all three issues simultaneously.

The need to provide a balanced emphasis can be seen when executives violate ethical and legal standards as in the case of misleading earning statements. One key study found that while the fines levied for "cooking the books" may appear small, other costs were far more substantial. The real costs to these firms came from a loss of the reputation in the business community. Customers lost confidence, suppliers demanded greater assurances, and, of course, the entire financial community undervalued the firm so that loan costs were higher, stock prices were lower, and scrutiny was more extensive. How big is big? The fines averaged about $23 million a firm. The estimated financial cost from the loss of reputation was estimated at 7.5 times the average fine. That yielded a loss of some $196 million.^[742]

Early research on culture and cultural change often emphasized direct attempts by senior management to alter the values and assumptions of individuals by re-socializing them—that is, trying to change their hearts so that their minds and actions would follow.^[743] The goal was to establish a clear, consistent organization-wide consensus. More recent work suggests that this unified approach of working through values may not be either possible or desirable.^[744]

Trying to change people's values from the top down without also changing how the organization operates and recognizes the importance of individuals does not work very well. Look again at the example of Cisco Systems. Here managers realized that maintaining a dynamic, change-oriented culture is a mix of managerial actions, decisions about technology, and initiatives from all employees. The values are not set and imposed from someone on high. The shared values emerge, and they are not identical across all of Cisco's operating sites. For instance, subtle but important differences emerge across their operations in Silicon Valley, the North Carolina operation, and the Australian setting.

It is also a mistake for managers to attempt to revitalize an organization by dictating major changes and ignoring shared values. Although things may change a bit on the surface, a deeper look often shows whole departments resisting change and many key people unwilling to learn new ways. Such responses may indicate that the managers responsible are insensitive to the effects of their proposed changes on shared values. They fail to ask whether the changes are contrary to the important values of participants within the firm, a challenge to historically important corporatewide assumptions, and inconsistent with important common assumptions derived from the national culture, outside the firm.

While organizational cultures help individuals cope with external adaptation and internal integration, the enduring pattern of observable actions, shared values, and common assumptions often does not evolve as quickly as required by innovations. Organizational cultural lag is a condition where dominant cultural patterns are inconsistent with new emerging innovations.^[745] As we suggested earlier, observable aspects of organizational culture such as rites, rituals, and cultural symbols often have powerful underlying meaning to organizational members. In a way they are symbols of prior successful ways to cope with external adaptation and internal integration. Individuals are often wary of abandoning the successful for an unproven new approach. One scholar notes that there can be a major "cultural drag on innovation from cultural legacies."^[746] These legacy effects come from an overreliance on rule following and reinforcement of old existing patterns of action.

Thus, one of the key challenges to management in promoting innovation where there are widely held and strong attached-to shared values and common assumptions is to show how they apply to the new innovations. When managers see an opportunity to develop new visions, create new strategies, and move the organization in new directions, they need to balance rule changing and rule following.^[747] If left uncontrolled, rule changing can yield run-away industry change that can quickly lead to chaos. While rule following can lead to a more stable industry structure and/or controlled industry change, there is also a danger of reinforcing cultural lag.